GEORGIA STATE UNIVERSITY FOUNDATION, INC. Consolidated Financial Statements For the (With Independent Auditors' Report)
Table of Contents Page Independent Auditors' Report... 1 Consolidated Statements of Financial Position... 2 Consolidated Statements of Activities... 3 Consolidated Statements of Cash Flows... 5... 6
INDEPENDENT AUDITORS REPORT The Board of Trustees Georgia State University Foundation, Inc. Atlanta, Georgia We have audited the accompanying consolidated statements of financial position of Georgia State University Foundation, Inc. (the Foundation ) as of June 30, 2011 and 2010, and the related consolidated statements of activities and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Foundation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Foundation as of June 30, 2011 and 2010, and changes in its net assets and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Atlanta, Georgia September 8, 2011 1
Consolidated Statements of Financial Position June 30, 2011 and 2010 2011 2010 Assets Cash and cash equivalents $ 6,776,469 $ 5,181,752 Pledges receivable, net (Note 3) 8,110,230 12,646,281 Accounts receivable 352,701 1,708,988 Investments (Note 4) 161,269,423 136,667,646 Net investment in direct financing leases (Note 6) 158,476,213 161,698,571 Restricted assets (Note 7) 36,409,593 35,003,060 Capitalized bond issuance cost (Note 8) 6,335,749 6,422,109 Cash surrender value of life insurance (Note 9) 957,804 901,899 Prepaid expenses and other assets 254,280 242,133 Real estate held for sale (Note 10) 1,232,756 - Property and equipment, net (Note 11) 48,297,809 53,406,652 Investments held for affiliates (Note 12) 6,947,629 6,158,694 Total Assets $ 435,420,656 $ 420,037,785 Liabilities and Net Assets Liabilities Accounts payable and accrued expenses $ 818,307 $ 764,144 Deferred revenue 270,608 265,533 Obligation under split-interest agreements 373,930 441,356 Obligation under leases (Note 13) 4,250,150 4,692,700 Bonds payable (Note 14) 252,106,900 257,012,586 Accrued interest on bonds payable 4,508,935 4,576,034 Investments held for affiliates (Note 12) 6,947,629 6,158,694 Total Liabilities 269,276,459 273,911,047 Net Assets Unrestricted (Note 17) 25,083,715 23,997,593 Temporarily restricted (Note 17) 52,910,365 47,007,466 Permanently restricted (Note 17) 88,150,117 75,121,679 Total Net Assets 166,144,197 146,126,738 Total Liabilities and Net Assets $ 435,420,656 $ 420,037,785 See accompanying notes to consolidated financial statements. 2
Consolidated Statements of Activities Year Ended June 30, 2011 (With Comparative Totals for 2010) Temporarily Permanently Total Unrestricted Restricted Restricted 2011 2010 Revenues, gains and other support Contributions $ 356,206 $ 8,765,542 $ 2,433,090 $ 11,554,838 $ 20,694,909 Rental income 6,683,598 252,000-6,935,598 8,163,061 Income from investment in direct financing leases 12,661,913 - - 12,661,913 12,308,225 Interest and dividend income 926,184 1,585,226-2,511,410 2,459,482 Realized gains (losses) on property (1,347,659) - - (1,347,659) 3,813,942 Realized gains (losses) on investments 157,478 (646,499) (110) (489,131) (608,792) Unrealized gains on investments 712,996 4,056,376 13,209,300 17,978,672 11,869,403 Change in: value of split-interest agreements - 71,580-71,580 272,816 cash surrender value of life insurance 2,642 53,263-55,905 26,246 Other income 645,324 185,089-830,413 347,136 Total revenues and gains 20,798,682 14,322,577 15,642,280 50,763,539 59,346,428 Net assets released from restrictions 11,033,520 (8,419,678) (2,613,842) - - Total revenues, gains and other support 31,832,202 5,902,899 13,028,438 50,763,539 59,346,428 Expenses Program services Capital projects, equipment and repairs 18,931,713 - - 18,931,713 22,784,413 Operations 3,857,231 - - 3,857,231 3,002,030 Faculty and staff 2,880,069 - - 2,880,069 2,284,512 Scholarships and awards 2,877,325 - - 2,877,325 2,704,750 Total program services 28,546,338 - - 28,546,338 30,775,705 Management and general 1,420,202 - - 1,420,202 1,513,161 Fundraising 1,077,632 - - 1,077,632 1,351,593 Total expenses 31,044,172 - - 31,044,172 33,640,459 Excess of revenues over expenses 788,030 5,902,899 13,028,438 19,719,367 25,705,969 Gain on bond refinancing 298,092 - - 298,092 - Change in net assets 1,086,122 5,902,899 13,028,438 20,017,459 25,705,969 Net assets, beginning of year 23,997,593 47,007,466 75,121,679 146,126,738 120,420,769 Net assets, end of year $ 25,083,715 $ 52,910,365 $ 88,150,117 $ 166,144,197 $ 146,126,738 See accompanying notes to consolidated financial statements. 3
Consolidated Statements of Activities Year Ended June 30, 2010 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues, gains and other support Contributions $ 293,928 $ 7,751,506 $ 12,649,475 $ 20,694,909 Rental income 7,923,061 240,000-8,163,061 Income from investment in direct financing leases 12,308,225 - - 12,308,225 Interest and dividend income 846,149 1,613,333-2,459,482 Realized gains real estate 3,813,942 - - 3,813,942 Realized losses on investments (8,477) (600,315) - (608,792) Unrealized gains on investments 1,907,918 2,165,021 7,796,464 11,869,403 Change in: value of split-interest agreements - 272,816-272,816 cash surrender value of life insurance 2,297 23,949-26,246 Other income 243,295 103,841-347,136 Total revenues and gains 27,330,338 11,570,151 20,445,939 59,346,428 Net assets released from restrictions 9,052,799 (6,756,601) (2,296,198) - Total revenues, gains and other support 36,383,137 4,813,550 18,149,741 59,346,428 Expenses Program services Capital projects, equipment and repairs 22,784,413 - - 22,784,413 Operations 3,002,030 - - 3,002,030 Faculty and staff 2,284,512 - - 2,284,512 Scholarships and awards 2,704,750 - - 2,704,750 Total program services 30,775,705 - - 30,775,705 Management and General 1,513,161 - - 1,513,161 Fundraising 1,351,593 - - 1,351,593 Total expenses 33,640,459 - - 33,640,459 Change in net assets 2,742,678 4,813,550 18,149,741 25,705,969 Net assets, beginning of year 21,254,915 42,193,916 56,971,938 120,420,769 Net assets, end of year $ 23,997,593 $ 47,007,466 $ 75,121,679 $ 146,126,738 See accompanying notes to consolidated financial statements. 4
Consolidated Statements of Cash Flows 2011 2010 Cash Flows from Operating Activities: Change in net assets $ 20,017,459 $ 25,705,969 Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities: Contributions restricted for long-term investment (5,399,352) (5,371,040) Depreciation and amortization 1,970,812 2,366,413 Loss on contributions to Georgia State University 583,899 - Gain on bond refinancing (298,092) - Loss (gain) on sale of property 763,760 (3,385,951) Gain on capital lease termination - (427,991) Amortization of deferred revenue 5,123 (564,399) Amortization of bond premium (564,410) (442,528) Amortization of bond discount 63,310 57,938 Unrealized gains on investments (18,050,252) (12,142,219) Decrease (increase) in pledges receivable 4,536,051 (9,072,948) Decrease (Increase) in other assets 1,288,235 (1,521,341) Increase (decrease) in accounts payables and other liabilities (80,410) 746,646 Net cash provided by (used in) operating activities 4,836,133 (4,051,451) Cash Flows from Investing Activities: Purchases of property and equipment (19,440) (23,060) Purchase of land held for sale (1,232,756) - Proceeds from sale of land 2,089,434 13,750,000 Principal payments received on direct financing leases 3,222,358 3,032,526 Purchases of investments (63,177,772) (91,254,631) Proceeds on sale of investments 56,626,247 72,626,449 Increase in restricted assets (1,406,533) (502,813) Net cash used in investing activities (3,898,462) (2,371,529) Cash Flows from Financing Activities: Proceeds from contributions restricted for long-term investment 5,399,352 5,371,040 Payments on capital lease obligations (442,550) (337,540) Payments for bond issuance costs (331,922) - Payments on revenue bonds payable (21,505,000) (3,025,000) Proceeds from issuance of bonds 17,537,166 - Net cash provided by financing activities 657,046 2,008,500 Net Increase (Decrease) in Cash and Cash Equivalents 1,594,717 (4,414,480) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,181,752 9,596,232 CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,776,469 $ 5,181,752 Supplemental Disclosure of Cash Flow Information: Cash paid during the year for interest $ 12,293,797 $ 11,158,804 See accompanying notes to consolidated financial statements. 5
Note 1 Organization Organization The Georgia State University Foundation, Inc. (the Foundation ) was incorporated in the State of Georgia in 1958 as a non-profit corporation and a 501(c)(3) tax exempt organization. The Foundation serves as the official fund-raising and fund-management organization for Georgia State University (the University ), and is committed to supporting and assisting the University in achieving its goals and objectives through soliciting and managing private gifts, and collaborating and advising on activities for the benefit and advancement of the University. In 1992, the Foundation formed the Georgia State University Building Foundation (the Building Foundation ) as a non-profit corporation. The Building Foundation was formed to purchase a building in downtown Atlanta, Georgia, in order to lease office and classroom facilities to the University and Foundation as its primary tenants. The Foundation appoints the Board of Directors of the Building Foundation. During the fiscal year 2001, the Foundation formed the University Lofts, LLC (the Lofts ), with the Foundation as the sole member. The Lofts were created for the building of a student housing facility for the University. During the fiscal year 2003, the Foundation formed Piedmont/Ellis, LLC ( Piedmont/Ellis ), with the Foundation as the sole member. Piedmont/Ellis was created for the purpose of acquiring, developing, operating and managing certain real property for the purpose of building a student housing facility for the University. During the fiscal year 2004, the Foundation formed Rialto Center, LLC, (the Rialto ) with the Foundation as the sole member. The Rialto was formed to purchase and renovate the Rialto Theater for benefit and use by the University. During the fiscal year 2007, the Foundation formed Panther Place, LLC ( Panther Place ), with the Foundation as the sole member. Panther Place was formed for the purpose of purchasing the SunTrust building and related property in downtown Atlanta, Georgia to provide office and classroom facilities for the University and Foundation. During the fiscal year 2009, the Foundation formed, as the sole member, Panther Fields, LLC ( Panther Fields ) for the purpose of investing in the acquisition of real property to provide a practice football field and facility for the benefit and use by the University. During the fiscal year 2009, the Foundation formed, as the sole member, Panther Lot, LLC ( Panther Lot ) for the purpose of acquiring, developing, operating and managing real property for the benefit and use by the University. During the fiscal year 2010, the Foundation formed, as the sole member, Panther Real Estate, LLC ( Panther Real Estate ) for the purpose of acquiring, developing, operating and managing real property for the benefit and use by the University. 6
Note 1 Organization (continued) Cooperative Agreement On October 23, 2008, the Foundation entered into a five year Memorandum of Understanding agreement with the University to operate as a Cooperative Organization under the guiding principles of the agreement. Income Tax Status The Foundation qualifies as a tax-exempt organization, exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (the Code ) and accordingly, there is no provision for income taxes in the accompanying consolidated financial statements. The Foundation is classified as a public charity under sections 509(a)(1) and 170(b)(1)(A)(iv) of the Code, and therefore the Foundation is not classified as a private foundation nor a supporting organization. Contributions to the Foundation qualify for the charitable contribution deduction under section 170 of the Code, and bequests, legacies, devises, transfers, or gifts to the Foundation are deductible for federal estate and gift tax purposes if they meet the applicable provisions of sections 2005, 2106, and 2522 of the Code. Note 2 Summary of Significant Accounting Policies Consolidated Financial Statements The consolidated financial statements include the accounts of the Foundation, the Building Foundation, the Lofts, Piedmont/Ellis, the Rialto, Panther Place, Panther Fields, Panther Lot and Panther Real Estate (collectively referred to as, the Foundation). All of the financial activities and balances of these organizations are included in the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. Financial Statement Presentation The accompanying financial statements have been prepared on the accrual basis of accounting and are presented in conformity with accounting principles generally accepted in the United States of America ( GAAP ). The Foundation is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Reclassification Certain reclassifications were made to the 2010 balances to conform to the 2011 presentation. Income Taxes The Foundation s policy is to record a liability for any tax position taken that is beneficial to the Foundation, including any related interest and penalties, when it is more likely than not the position taken by management with respect to a transaction or class of transactions will be overturned by a taxing authority upon examination. Management believes there are no such positions as of June 30, 2011 and, accordingly, no liability has been accrued. 7
Note 2 Summary of Significant Accounting Policies (continued) Net Assets The Foundation classifies net assets, revenues, and gains and losses on investments based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of the Foundation and changes therein are classified and reported as follows: Unrestricted net assets Net assets that are not restricted by the donor. These assets are used to support the operations of the Foundation and are at the discretion of the Foundation s Board of Trustees. Temporarily restricted net assets Net assets from contributions and other inflows of assets limited by donor-imposed restrictions as to periods of time or specified purposes. Temporarily restricted net assets are released from restrictions when the related time period lapses or the restricted purpose is met. Expenditures that relate to the fulfillment of the temporary restriction are shown as a reduction in temporarily restricted revenue as net assets released from restrictions. Permanently restricted net assets Net assets from contributions and other inflows of assets limited by donor-imposed restrictions that neither expire with the passage of time nor can be fulfilled or otherwise removed by actions of the Foundation. Permanently restricted net assets are invested in perpetuity subject to periodic allocations made for spending specified by donor stipulations and applicable state law. Unrealized and realized gains and losses, and dividends and interest from investing activities may be included in any of these net asset classifications depending on donor-imposed restrictions and the Foundation s interpretation of relevant state law. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues, expenses, gains, losses and other changes in net assets during the reporting period. Actual results could differ from those estimates. Fair Values of Financial Instruments The carrying value of financial instruments such as cash and cash equivalents, other receivables, due to/from related organizations, accounts payable and accruals approximate fair value because of the terms and relative short maturity of the financial instruments. The Foundation believes the carrying values of its financial instruments are reasonable estimates of their values, unless otherwise noted. 8
Note 2 Summary of Significant Accounting Policies (continued) In determining fair value, the Foundation uses various valuation approaches. The fair value hierarchy for inputs used in measuring fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Foundation. Unobservable inputs reflect the Foundation s assumption about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is classified in one of the following three levels based on the inputs: Level 1: Level 2: Level 3: Financial instruments with unadjusted, quoted prices listed on active market exchanges. Financial instruments valued using inputs that include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Financial instruments that are not actively traded on a market exchange and require using significant unobservable inputs in determining fair value. The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors, including the type of security, whether the security is new and not yet established in the marketplace, and other characteristic particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Foundation in determining fair value is greatest for securities categorized in level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined by the lowest level input that is significant to the fair value measurement. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Foundation s own assumptions are set to reflect those that the market participants would use in pricing the asset or liability at the measurement date. The Foundation uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy. Revenue Recognition Revenue from exchange transactions, investment activities, rental and property management activities, management fees, royalties, other fees and charges, and other non-contribution related revenue are recognized as earned. 9
Note 2 Summary of Significant Accounting Policies (continued) Cash and Cash Equivalents The Foundation s management considers cash and cash equivalents to include demand deposits, money market accounts and other assets of high liquidity except those amounts designated and classified as investments. In July 2010, the Federal Deposit Insurance Corporation ( FDIC ) permanently increased insurance coverage to $250,000 for substantially all depository accounts. Additionally, through December 31, 2012, deposits held in non-interest bearing transaction accounts will be fully insured, regardless of the amount in the account, at all FDIC-insured depository institutions. The Foundation from time to time may have amounts on deposit in excess of the insured limits. Concentrations of Credit Risk Financial instruments which potentially subject the Foundation to concentrations of credit risk consist principally of investments. Management recognizes this risk as a cost of doing business and manages risk through the investment policy objectives and asset allocation strategy as adopted by the Foundation. Investments All investments in debt and equity securities with a readily determinable market value are reported at fair value with gains and losses included in the consolidated statements of activities based on quotations obtained from national securities exchanges. Alternative investments, which are not readily marketable, are carried at estimated fair values as provided by external investment managers. The Foundation reviews and evaluates the values provided by the investment managers and agrees with the valuation methods and assumptions used in estimating the fair value of the alternative investments. The estimated fair values may differ significantly from the values that would have been used had ready markets for these securities existed. Investment securities, in general, are exposed to various risks, such as interest rate, credit and overall market volatility. Due to the level of risk associated in the values of investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the Foundation s consolidated financial statements. The Foundation s Board of Trustees approved investment policy defines the asset allocation for the operating and endowment investment pools and also the spending allocation from the endowment investment pool. With the exception of certain restricted contributions that are separately invested, all restricted endowment contributions are invested on a pooled accounting basis. Based on the interpretation of donor-imposed restrictions and applicable state law, the endowment investment pool total investment return including appreciation, depreciation, income, expenses and fees is allocated to each endowment based on the ratio of that endowment s investment balance to the total endowment investment pool. The approved endowment spending allocation is defined in greater detail in Note 5. 10
Note 2 Summary of Significant Accounting Policies (continued) The Foundation has ownership of certain cash equivalents that are not in the possession of the Foundation but are held, along with other investment securities, by outside investment managers. Although these cash equivalents are readily available, it is the intent of the Foundation to hold these cash equivalents for investment purposes and therefore has classified them as investments. Cost of Services The cost of services rendered by the Development Division of the University for fundraising activities is borne both by the Foundation and the University. The portion of the costs borne by the University is not included in the Foundation s consolidated financial statements, as these costs would have been incurred by the University even if the Foundation did not exist. The cost of services provided by the University was $2,804,296 and $2,255,616 for the years ended June 30, 2011 and 2010, respectively. Administrative Fees Administrative fees are utilized to cover operating costs of the Foundation, assist with development activities and provide additional funds to the University. The fees include 1% of the fair value of endowments annually, plus the net income earned from the non-endowed investment portfolio. Contributions Contributions received are recorded as unrestricted, temporarily restricted or permanently restricted support, depending on the existence and/or nature of any donor restrictions. Pledges Receivable Unconditional promises to give (pledges receivable) are recognized as revenue and asset in the period the promise is received. Pledges receivable are recorded at their net realizable value. Pledges expected to be collected in future years are discounted based on the present value of the estimated future cash flows. The discounts on those amounts are computed using estimated risk-free interest rates. An allowance for uncollectable pledges is estimated based on the Foundation s collection history and is netted against the gross pledges receivable. Contributed Goods and Services Contributions of securities, land, buildings and other nonmonetary assets which can be objectively measured are recorded at their fair value at the date of contribution. Certain nonmonetary assets such as art objects, equipment and books that are donor designated for the direct use by the University or one of its departments are not included in the consolidated financial statements. Donated services of volunteers have not been recorded in the consolidated financial statements since they do not meet the recognition criteria established in GAAP. 11
Note 2 Summary of Significant Accounting Policies (continued) Split-Interest Agreements The Foundation is trustee for two types of split-interest agreements which are irrevocable charitable remainder trusts and charitable gift annuities, whereby donors contribute assets to the Foundation in exchange for the right of a named beneficiary to receive a fixed dollar amount or a specific percentage of the fair value of the trust assets during the beneficiary s lifetime. The contributed assets are recorded at fair value when received and a liability is recognized at the present value of future cash flows expected to be paid to the beneficiary. The amount in which the fair value of assets at the date received exceeds the payment liability is recognized as a contribution in accordance with the intent expressed in the agreement. The assets in the split-interest agreements are invested in common trust funds classified as Level 2 investment stated at fair value and included in investments in the combined statement of financial position. The liability in the split-interest agreements is reviewed and revalued annually based on actuarially computed present values and reported as obligation under split-interest agreements in the consolidated statement of financial position, with the resulting actuarial gain (loss) recorded as a change in value of split-interest agreements in the combined statement of activities. The assets of each charitable remainder trust may be invaded in cases where investment earnings are not sufficient to make the required periodic payments. If the assets of the charitable remainder trust are invaded to the extent that it is depleted, the Foundation has no further financial obligation to the donors, beneficiaries or other remaindermen, if any. When the trust matures, any remaining assets of the trust revert to the Foundation as specified in each agreement. The charitable gift annuities consist of assets donated to the Foundation through an agreement under which the Foundation is obligated to pay the beneficiary a fixed amount for the remainder of their lives even if the assets of the charitable gift annuity have been depleted. Life Insurance Life insurance consists of life insurance policies purchased by the donor where the Foundation is named as owner and beneficiary of the policy. The assets contributed under these life insurance policies are carried at fair value approximated by the cash surrender value, net of any policy loans. The life insurance policy cash surrender value is updated annually and changes in value are recorded as a change in cash surrender value of life insurance in the combined statement of activities. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 45 years. Equipment, betterments or renewals in excess of $5,000 are capitalized. Normal repairs and maintenance costs are expensed as incurred. 12
Note 2 Summary of Significant Accounting Policies (continued) Impairment of Long-lived Assets The Foundation reviews the carrying value of its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets to be held and used may not be recoverable. Management does not believe there are any indications of impairment of any long-lived property and equipment at June 30, 2011. Reclassification of Donor Intent At times the Foundation receives requests by donors or their designees to change the use for which the donor s original gift was intended. These donor requests are reviewed by the Foundation for approval, and if approved, may result in the reclassification of net assets between unrestricted, temporarily restricted, or permanently restricted net assets. Note 3 Pledges Receivable Pledges receivable at June 30, 2011 and 2010 consists of the following: 2011 2010 Unconditional promises expected to be collected in: Less than one year $ 3,208,223 $ 5,619,319 One to five years 5,142,156 7,482,964 More than five years 81,250 107,500 Total unconditional promises to give 8,431,629 13,209,783 Less discounts to net present value discount (276,948) (440,629) (rate 3.16% in 2011, 2.95% in 2010) Less allowance for uncollectable promises to give (44,451) (122,873) Net pledges receivable $ 8,110,230 $ 12,646,281 The Foundation s pledges receivables recorded at fair value have been categorized based upon a fair value hierarchy (See Note 2). All valuations are classified as Level 3 within the fair value hierarchy based on observable and unobservable inputs. The Foundation took into account historical and projected cash flow, collectability and default rates. 13
Note 3 Pledges Receivable (continued) The following summarizes the activities in the Level 3 pledges receivable measured at fair value for the years ended June 30, 2011 and 2010: 2011 2010 Beginning balance $ 12,646,281 $ 3,573,333 New pledges 924,696 13,948,522 Pledges payments (5,702,850) (4,512,714) Net fair valuation adjustment 242,103 (362,860) Total level 3 pledges receivable $ 8,110,230 $ 12,646,281 Note 4 - Investments A summary of the aggregate cost and fair value of investment securities as of June 30, 2011 and 2010 (exclusive of securities held in agency accounts) and realized and unrealized gains and losses are as follows: June 30, 2011 June 30, 2010 Cost Fair Value Cost Fair Value Money market funds $ 42,461,259 $ 42,461,286 $ 43,622,981 $ 43,623,125 Equities and equity funds 67,009,572 78,660,773 60,739,738 56,566,416 Fixed income securities and funds 33,290,021 34,750,241 31,805,412 32,498,178 Real estate investment trust funds 3,518,748 5,397,123 3,417,299 3,979,927 Total $ 146,279,600 $ 161,269,423 $ 139,585,430 $ 136,667,646 Realized Unrealized Realized Unrealized Gains/(Losses) Gains/(Losses) Gains/(Losses) Gains/(Losses) Equities and equity funds $ (1,118,223) $ 15,817,580 $ (2,046,074) $ 9,243,693 Fixed income securities and funds 629,092 845,346 1,478,187 799,771 Real estate investment trust funds - 1,315,746 (40,905) 1,825,939 Total $ (489,131) $ 17,978,672 $ (608,792) $ 11,869,403 14
Note 4 Investments (continued) The investment return and allocation of the endowment investment pools as of June 30, 2011 and 2010 are summarized below: June 30, 2011 June 30, 2010 Endowment Operating Endowment Operating Pool Pool Pool Pool Dividends and interest income $ 1,868,353 $ 452,989 $ 1,860,928 $ 273,126 Net realized gains (losses) (629,254) 146,794 (600,035) (858,040) Net unrealized gains (losses) 17,146,274 712,996 9,902,011 1,907,918 Investment management fees (302,633) (124,184) (266,923) (98,617) Total investment return 18,082,740 1,188,595 10,895,981 1,224,387 Administrative fees (981,065) (1,237,849) (812,646) (1,224,292) Endowment spending allocation (3,722,629) 3,722,629 (3,461,214) 3,461,214 Net investment return after fees and allocations $ 13,379,046 $ 3,673,375 $ 6,622,121 $ 3,461,309 The following table summarizes the fair value measurements of certain investments that calculate net asset value per share (or its equivalent) as of June 30, 2011: Description Fair Value Unfunded Commitments Redemption Frequency (If Currently Eligible) Redemption Notice Period Equity - multi-strategy hedge funds (a) $ 10,879,392 $ - quarterly, annually 60 days Limited partnerships - private equity (b) 5,426,568 7,076,839 Real estate (REIT) funds (c) 71,980 215,770 Total $ 16,377,940 $ 7,292,609 (a) This category employs a fund of hedge funds portfolio construction. This category invests in multiple strategy hedge funds to add diversification and reduce volatility of the portfolio. The fund of fund managers allocate across a broad range of hedge fund categories including long/short, event driven and arbitrage strategies that provide low correlation to other asset classes in the portfolio. The fair values of the investments in this category have been estimated using net asset value per share of the investments. 15
Note 4 Investments (continued) (b) This category includes several private equity funds that employ a fund of funds approach that invests both domestic and international in venture capital, buyouts, mezzanine, secondary markets and other areas within private equity. These investments are less liquid and, generally, cannot be redeemed with the funds through normal redemption procedures. Instead, the nature of the investments in this category is that the distributions are received through the liquidation of the underlying assets of the fund. As of June 30, 2011, it is probable that all of the investments in this category will be sold at an amount different from the net asset value of the Foundation s ownership interest in partner capital. Therefore, the fair values of the investments in this category have been estimated using recent observable transaction information for similar investments. (c) This category includes real estate funds that invests primarily in U.S. commercial real estate. The fair values of the investment in this category have been estimated using the net asset value of the Foundation s ownership interest in partners capital. These investments are less liquid and, generally, cannot be redeemed with the funds through normal redemption procedures. Distributions from this fund will be received as the underlying investments of the fund are liquidated. The Foundation s investment assets recorded at fair value have been categorized based upon a fair value hierarchy (See Note 2). The following tables summarize the valuation of the Foundation s financial assets and liabilities measured at fair value as of June 30, 2011 and 2010: Fair Value Measurements at June 30, 2011: Level 1 Level 2 Level 3 Total Investments: Money Market Funds $ - $ 42,461,286 $ - $ 42,461,286 Fixed income securities - 34,750,241-34,750,241 Equity securities 307,567 62,047,246 10,879,392 73,234,205 Limited partnerships - - 5,426,568 5,426,568 REIT's - 5,325,143 71,980 5,397,123 Fair Value Measurements at June 30, 2010: $ 307,567 $ 144,583,916 $ 16,377,940 $ 161,269,423 Level 1 Level 2 Level 3 Total Investments: Money Market Funds $ 800,000 $ 42,823,125 $ - $ 43,623,125 Fixed income securities - 32,498,178-32,498,178 Equity securities 244,645 42,611,082 9,228,601 52,084,328 Limited partnerships - - 4,482,086 4,482,086 REIT's - 3,905,029 74,900 3,979,929 $ 1,044,645 $ 121,837,414 $ 13,785,587 $ 136,667,646 16
Note 4 Investments (continued) The following summarizes the activities in the Level 3 category of investments for the year ended June 30, 2011: Realized or unrealized Description Beginning Balance gains (losses) Purchases and Sales Ending Balance Fixed Income $ - $ - $ - $ - Equity Securities 9,228,601 651,891 998,900 10,879,392 Limited Partnerships 4,482,086 365,059 579,423 5,426,568 REIT's 74,900 (2,920) - 71,980 Total Level 3 investments $ 13,785,587 $ 1,014,030 $ 1,578,323 $ 16,377,940 The following summarizes the activities in the Level 3 category of investments for the year ended June 30, 2010: Description Beginning Balance Realized or unrealized gains (losses) Purchases and Sales Ending Balance Fixed Income $ 8,183,449 $ 111,010 $ (8,294,459) $ - Equity Securities 8,906,100 797,201 (474,700) 9,228,601 Limited Partnerships 3,496,079 227,334 758,673 4,482,086 REIT's 110,230 (35,330) - 74,900 Total Level 3 investments $ 20,695,858 $ 1,100,215 $ (8,010,486) $ 13,785,587 Split-Interest Agreements The Foundation is the trustee and remainder beneficiary of certain split-interest agreements. The assets of these split-interest agreements are invested in equities and bonds and reported as Level 2 investments and are recorded at fair value. The value of the split interest agreements as of June 30, 2011 and 2010 were $503,657 and $493,563, respectively. 17
Note 4 Investments (continued) Business Student Trust Fund During 1972, a trust fund was established to allow business students regularly enrolled at the University to gain practical experience in the fields of investment analysis and management, fund management and related areas. An initial contribution of $5,000 and supplemental contributions of $15,000 were made from unrestricted resources of the Foundation for this purpose. No further contributions to this trust are required. If this trust was terminated, any funds remaining after payment of all debts would be returned to the Foundation to be used for educational purposes. The value of the trust fund as of June 30, 2011 and 2010 was $307,567 and $244,645, respectively. Note 5 Endowments The Foundation s endowment consists of approximately 300 individual funds established for a variety of purposes including both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. Net assets associated with endowment funds, including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. Interpretation of Relevant Law The Board of Trustees of the Foundation has interpreted the Georgia Uniform Prudent Management of Institutional Funds Act (UPMIFA) of 2008 as requiring the assets of an endowment fund be donor restricted until allocated for spending, unless otherwise specifically stated in the gift instrument. The Board believes this interpretation is consistent with long established Board approved investment and spending policy which is specifically referenced in the Foundation s endowed gift instrument. In accordance with the investment policy and UPMIFA, with the exception of certain restricted assets that are separately invested, all restricted endowment assets are invested in the endowment pool on a pooled basis until allocated for spending. As a result of this interpretation, the Foundation classifies permanently restricted net assets as assets that, under the terms of the gift instrument, are permanent endowments not wholly expendable by the Foundation on a current basis until a portion is allocated for spending. Permanently restricted assets are invested in perpetuity in the endowment investment pool subject to periodic spending allocations where a portion of the donor-restricted endowment fund in permanently restricted nets assets is allocated and classified as temporarily restricted net assets available for spending. The endowment investment pool also includes donor-restricted funds classified as temporarily restricted net assets, not specifically designated as permanently restricted endowment funds but they are restricted and designated for a particular college or unit of the University. From time to time the Foundation will approve requests from a college or unit to invest a portion of these funds in the endowment investment pool. These funds are designated as quasi endowments or funds functioning as endowments. The Foundation classifies these funds and the related investment return and spending allocation as temporarily restricted net assets. There are no unrestricted net assets invested in the endowment investment pool. 18
Note 5 Endowments (continued) Based on the interpretation of the investment policy and UPMIFA, the total return of the endowment investment pool including appreciation/inflation, depreciation/deflation, income, expenses and fees shall be allocated to each endowment based on the ratio of that endowment s investment balance to the total endowment pool and included as part of the endowment net asset classification. Endowment Spending Policy In accordance with UPMIFA the Foundation considers the following factors in making a determination to appropriate and allocate assets for spending or accumulate assets of an endowment fund: 1. The duration and preservation of the fund 2. The purposes of the Foundation and the endowment fund 3. General economic conditions 4. The possible effect of inflation and deflation 5. The expected total return from income and the appreciation of investments 6. Other resources of the Foundation 7. The investment policies of the Foundation According to the spending policy, the Foundation is not obliged to allocate for spending a stated percentage of its endowment assets in any given year. However, in order to achieve both reasonable stability in budgeting and a reasonable balance between near-term and distant programmatic priorities, the Board has adopted the following spending policy: The allocation for spending in any given fiscal year shall equal: 70% of spending for the prior year, adjusted for cumulative changes in inflation (as measured by CPI), plus 30% of Foundation s long-term spending rate (currently 4.5%) applied to the endowment s market value at the beginning of the year. This amount is divided by the endowment market value at the beginning of the year to calculate the spending allocation rate, which was 4.8% for the year ended June 30, 2010. The spending allocation rate for the year ended June 30, 2011 of 4.3% was applied to each individual endowment based on its average market value during the year. The total endowment spending allocation distributed for the years ended June 30, 2011 and 2010 was $3,722,629 and $3,461,214, respectively. To the extent that the endowment investment pool s total return is greater or less than the allocations made for spending, the fair value of each endowment increases or decreases accordingly. Return Objectives and Risk Parameters The Foundation s return objective is to preserve and if possible enhance the purchasing power of its endowment, net of cost and board-approved withdrawal, over a rolling five-year period. The goal is the pursuit of a time-weighted net return on endowment assets that equals, and if possible exceeds, inflation (as measured by CPI) plus the Foundation s long-term spending allocation rate, measured over rolling five-year periods. 19
Note 5 Endowments (continued) The Foundation stands prepared to incur risks consistent with its pursuit of the return objective set forth above, subject to two overarching limits. Its endowment investment pool should be deployed in a manner that reduces to tolerable levels (defined as 25% or below) the probabilities that it will suffer (1) peak-to-trough declines in endowment purchasing power exceeding 30% or (2) a shortfall exceeding 3% in the Foundation s annualized endowment returns relative to those of an approved peer group measured over rolling 5 year periods. Endowment Net Asset Composition by Type of Fund as of June 30, 2011: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ - $ - $ 81,289,365 $ 81,289,365 Quasi-endowment funds - 24,961,706-24,961,706 Total endowment net assets $ - $ 24,961,706 $ 81,289,365 $ 106,251,071 Endowment Net Assets Composition by Type of Fund as of June 30, 2010: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ - $ - $ 65,294,665 $ 65,294,665 Quasi-endowment funds - 18,365,220-18,365,220 Total endowment net assets $ - $ 18,365,220 $ 65,294,665 $ 83,659,885 20
Note 5 Endowments (continued) Endowment Related Activities by Type of Fund as of June 30, 2011: Donor-restricted Endowment Funds Quasi- Endowment Funds Endowment net assets, July 1, 2010 $ 65,294,665 $ 18,365,220 $ 83,659,885 Total Net realized and unrealized gains 13,209,300 3,875,086 17,084,386 Contributions 5,399,353 1,867,954 7,267,307 Allocation of endowment assets for expenditure (2,882,710) (839,919) (3,722,629) Transfers to comply with donor intent 244,898 1,717,224 1,962,122 Reclassification of donor intent 23,859 (23,859) - Endowment net assets, June 30, 2011 $ 81,289,365 $ 24,961,706 $ 106,251,071 Endowment Related Activities by Type of Fund as of June 30, 2010: Donor-restricted Endowment Funds Quasi- Endowment Funds Endowment net assets, July 1, 2009 $ 54,423,358 $ 16,369,914 $ 70,793,272 Total Net realized and unrealized gains 7,796,464 2,286,935 10,083,399 Contributions 5,371,040 246,376 5,617,416 Allocation of endowment assets for expenditure (2,679,027) (782,187) (3,461,214) Transfers to create board designated endowment - 100,000 100,000 Transfers to comply with donor intent 369,443 157,569 527,012 Reclassification of donor intent 13,387 (13,387) - Endowment net assets, June 30, 2010 $ 65,294,665 $ 18,365,220 $ 83,659,885 21
Note 5 Endowments (continued) Description of Amounts Classified as Permanently Restricted Net Assets and Temporarily Restricted Net Assets (Endowment Only) 2011 2010 Permanently Restricted Net Assets The Portion of perpetual endowment funds that is required to be retained permanently either by explicit donor stipulation or by UPMIFA $ 81,289,365 $ 65,294,665 Total endowment funds classified as permanently restricted net assets $ 81,289,365 $ 65,294,665 Temporarily Restricted Net Assets Quasi-endowment funds $ 24,961,706 $ 18,365,220 Total endowment funds classified as temporarily restricted net assets $ 24,961,706 $ 18,365,220 Note 6 Net Investment in Direct Financing Leases The components of the net investment in direct financing leases at June 30, 2011 and 2010 are as follows: 2011 2010 Future minimum lease receipts Alpharetta $ 11,829,312 $ 13,063,890 Future minimum lease receipts Student Recreation Center 33,742,531 36,891,936 Future minimum lease receipts Piedmont Ellis 338,353,404 348,407,121 Gross investment in direct financing leases 383,925,247 398,362,947 Less unearned interest income (225,449,034) (236,664,376) Net investment in direct financing leases $ 158,476,213 $ 161,698,571 22
Note 6 Net Investment in Direct Financing Leases (continued) Future minimum net amounts receivable under direct financing leases at June 30, 2011 are as follows: Year Ending June 30, 2012 $ 14,779,554 2013 15,140,318 2014 15,485,700 2015 15,856,176 2016 16,236,225 2017-2021 83,036,457 2022-2026 60,963,745 2027-2031 61,670,184 2032-2036 62,591,209 2037-2039 38,165,679 Gross investment in direct financing lease 383,925,247 Less unearned interest income (225,449,034) Net investment in direct financing leases $ 158,476,213 Note 7 Restricted Assets Pursuant to the terms of various bonds payable and capital lease arrangements for the construction of long-lived assets and debt services requirements, the Foundation is required to maintain amounts on deposit with a trustee, including charitable trust held by others. Restricted assets primarily represent fixed income securities with varying maturity dates and cash equivalents and are related to the following facilities and other assets: 2011 2010 Alpharetta Center $ 337,230 $ 590,851 Student Recreation Center 3,091,861 2,826,443 Piedmont Ellis 21,326,460 19,499,349 Panther Place 11,653,942 12,086,317 Charitable trusts held by others 100 100 Total restricted assets $ 36,409,593 $ 35,003,060 23
Note 8 Capitalized Bond Issuance Cost Capitalized bond issuance cost includes costs incurred to secure and rate bonds and are amortized over the term of the bonds using the straight-line method (which approximates the effective interest rate method). Capitalized bonds issuance cost consists as of June 30: 2011 2010 Alpharetta Campus - bond issuance cost $ 137,544 $ 156,300 Student Recreation Center - original issuance cost - 150,642 Student Recreation Center - new issuance cost 314,389 - Piedmont Ellis - bond issuance costs 3,554,358 3,695,591 Panther Place - bond issuance costs 2,329,458 2,419,576 Total deferred costs $ 6,335,749 $ 6,422,109 Note 9 Cash Surrender Value of Life Insurance The Foundation is the owner and beneficiary of numerous life insurance policies. As of June 30, 2011 the total face value of the policies was $3,795,629. Premiums on some of the policies are paid by the Foundation with the corresponding amounts received back from the donors as contributions. While the cash surrender value of the policies has been recorded in the Foundation's consolidated statements of financial position, the face value of the policies will be recognized upon receipt of the insurance proceeds. The annual change in the cash surrender value of the life insurance policies are recorded in the consolidated statement of activities. The cash surrender value of the policies as of June 30, 2011 and 2010, were $957,804 and $901,899, respectively. Note 10 Real Estate Held for Sale On September 30, 2010, Panther Lot purchased certain land at a purchase price of approximately $1,233,000 for the purpose of holding and eventually selling the property to the University. 24